Chief of France’s Peugeot faces challenges

Analysts say CEO Varin has made progress, but expansion still key

MADRID (MarketWatch) — “No drama Varin.” That’s one nickname the chief executive officer of PSA Peugeot Citroen has earned during his first year and a half at France’s biggest car maker.

Philippe Varin has made slow but steady progress since taking the steering wheel at Peugeot (UG), returning the company to profitability thanks to new models. From a low point in the summer Varin took office, the firm’s shares have gained roughly 53%.

“I think he’s definitely had a positive impact on the company,” said Anil Valsan, global director of research in the auto practice of consultancy Frost & Sullivan. “He’s kept the company in pace with the turnaround in the global auto industry in the last six to eight months.”

But there are challenges ahead. The outlook for European automotive markets remains clouded following the end of car-scrappage schemes. Peugeot has warned the second half of the year will see its auto unit close to breakeven. Moreover, Varin has to please the Peugeot family, a majority shareholder, and the French government, which loaned the company 3 billion euros ($4.2 billion) to get through the economic crisis. And analysts say international expansion, particularly in China, is still on their wish list.

“If you’re looking for growth and if you are present in Europe, all you are doing is fighting for market share. You’re not growing. All of these guys are looking at BRIC [Brazil, Russia, India, China] markets for growth,” said Paul Newton, global automotive analyst at IHS Global Insight.

Under Varin, Peugeot is making inroads in Russia, South America and China, Newton said.

“In China, they are doing all the right things to establish a global footprint in that region,” he said. “The problem is, are their products going to be competitive in China?”

High road to China

In a recent interview with French daily Le Figaro, Varin said he expects China to move from its position as No. 2 market for Peugeot to No. 1.

The company said last month it was beefing up its partnership with Dongfeng Motors Group Co. (489) in China, aiming for 5% market share and 12 new vehicle launches over the next five years.

Peugeot and its joint-venture partner Mitsubishi Motors Corp. (7211) also last month announced three new crossover models for Russia: the Citroen C-Crosser, Peugeot 4007 and Mitsubishi Outlander. But many were disappointed that the company couldn’t ink a capital alliance deal earlier this year with Mitsubishi, along the lines of the alliance between Renault SA (RNO) and Nissan Motor Corp. (7201). The Renault-Nissan tie-up, established over 10 years ago, has allowed those companies to tap into global markets with high-volume small cars.

“Peugeot is doing a 408 for China, which is a top-end vehicle, arguably what they need to be doing in that market, but I don’t have a grasp on how their brand is perceived in China,” said Michael Tyndall, auto specialist at Nomura International.

Tyndall said he recently did a survey in which he asked investors what they thought was most important in terms of earnings for auto companies and geographic exposure stood out by considerable margin.

“Unfortunately for Mr. Varin, he’s predominantly exposed to Europe and predominantly exposed to the mass-market segment,” Tyndall said. “I’m afraid they’re two areas where the market is particularly bearish.”

Some say the Peugeot family itself has held the company back from pushing deeper into emerging markets through other tie-ups that deplete its power as a majority shareholder. Hope lies with Varin, who, unlike predecessor Christian Streiff, appears to be finding some middle ground between shareholders, the Peugeot family and the French government. Varin perked up shares a few weeks ago with news the company would make an early €1 billion payment on its government debt.

“His patient, systematic approach has proven to be effective and should more than satisfy the Peugeot family and other investors,” said analysts at Societe Generale in a research note. Coining the “no drama” nickname, they said Varin has been a “proven value creator and no stranger to market challenges.”

Shares of Peugeot are up 7% year-to-date, roughly in line with the share performance of Renault SA (RNO) and Fiat SpA (F)

Recently, Standard & Poor’s revised its rating outlook on Peugeot to stable from negative, saying a recovery in car demand has boosted its operating profit. The agency said Peugeot has saved €854 million euros out of the €1.1 billion it has targeted for 2010 as part of an effort to save €3.3 billion by 2012.

Structural weaknesses

IHS’s Newton said that Peugeot has “too many structural weaknesses” to make the firm a strong, long-term investment.

“They continue to strive to address these issues (overreliance on France/Europe, investment in growth markets), but I have not seen anything that convinces me the company is on the right track,” said Newton. “They have the right ideas, but always seem to fall short of the necessary investment, or commitment.”

Analysts at Societe Generale, though, said investors give the company “no credit for the progress already locked in at PSA or the potential for further advances in terms of cost savings, range renewal and brand revitalization.” They said the 3008, 5008 and RCZ models have taken the company’s brand footprint into sectors previously dominated by the competition.

The company, which is due to launch its own electric car in 2010, has also announced the world’s first diesel hybrid, the Peugeot 3008 HYbrid4, which combines diesel and electric power. The car will launch in spring 2011.

“If I measure him [Varin] against his own plan to make the business more international, to narrow down the number of alliances, I think that is a work in progress,” Tyndall said. “It’s probably too early to measure his success but it appears he is progressing to plan.”

Varin’s 2010-2012 performance plan, announced shortly after his arrival, followed on from the principles of Streiff. Analysts like the fact Varin is comparing Peugeot to its peers and wants to close the earnings gap.

That eagerness to breach the gap is one reason Chad Deakins, who manages the Ridgeworth International Equity fund
STITX, -0.48%
has been so keen on the stock. He has owned shares of Peugeot since market lows in 2008 and sees a good amount of upside left.

”They have a solid plan and investors are getting more and more confident about the management team and Varin has a history of success, which I think will benefit investors,” said Deakins. “He came in and gave fresh motivation and energy to some of the existing programs and put in a bit more focus by looking around and seeing what other people were doing.”

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